IP: Battling against foreign trade secret theft

Imagine your American company decides to compete globally (which is more and more of a reality for many businesses today). For any number of reasons, your company opens manufacturing facilities or sales offices in certain foreign countries. Alternatively, your company licenses your valuable technology to a foreign entity. To compete effectively in these foreign markets, your company’s priceless intellectual property, including trade secrets, follows your business there.

It’s no surprise your business in the foreign country has great success. But then, as is far too often the case, another foreign entity poaches your foreign employees or business associates with money enticements. They illegally take your company’s invaluable trade secrets with them. Suddenly, your company is competing against its own intellectual property, including the threat of competing in the U.S. What do you do now?

Putting aside any action under foreign laws in foreign forums, there are three potential options for enforcement of trade secret rights in the U.S., provided a product made from or using the trade secrets is imported there. The first option is to file an action in the International Trade Commission (ITC). The second option is to file a civil action in federal or state court where jurisdiction lies. The third option is to seek federal or state prosecution to bring criminal charges against the perpetrators. The legal climate is right for obtaining appropriate remedies through innovative theories that seek justice. One example follows.

Amsted Industries Inc. approached me with a concern that a Chinese company called Tianrui had misappropriated trade secrets from Amsted’s licensee in China. The trade secrets related to the manufacture of cast-steel railway car wheels. Tianrui was about to start selling the Tianrui railway wheels in the U.S. Amsted wanted to stop Tianrui. Because there were not any significant sales yet for money damages, we recommended filing an action in the ITC to prevent the importation into the U.S. of products that originated from unfair trade practices.

We had three major hurdles facing the ITC action. First, the trade secret misappropriation took place in China, which raised significant issues of applying U.S. laws extraterritoriality. Second, Amsted was not using in the U.S. the trade secrets misappropriated by Tianrui, which raised significant issues about whether an ITC action would be protecting a domestic industry, as required, when that domestic industry did not use the trade secrets. Finally, Amsted had to establish that its licensee took reasonable efforts to protect the secrecy of the Amsted trade secrets, a difficult proof for a Chinese company that may not have been as careful as a U.S. company on those types of safeguards and protections.

In the end, the Federal Circuit affirmed the ITC’s 10-year exclusion order preventing Tianrui from selling its wheels in the U.S. In a case of first impression, the court held that the ITC could apply U.S. domestic trade secret law to misappropriation that solely occurs in a foreign country. The court dismissed Tianrui’s arguments that the rulings are applying U.S. law to extraterritorial conduct and interfering with Chinese trade secret law. The overriding public policy of preventing unfair trade practices carried the day. Also, although the U.S. domestic industry injured was not using the trade secrets at issue, the Tianrui conduct injured a related domestic industry that was selling cast-steel railway wheels. Again, this was an issue of first impression that was found sufficient to invoke the protections of Section 337 of the Tariff Act.

Most state trade secret statutes define “misappropriation” as an “acquisition, disclosure or use” of a trade secret of another person by improper means. “Use” is a broad concept under trade secret law. This is particularly important when the stolen trade secrets themselves cannot be determined by inspecting the product. For example, in Cognis v. Chemcentral Corp., the Northern District of Illinois explained that “marketing goods that embody the trade secret, employing the trade secret in manufacturing or production, relying on the trade secret to assist or accelerate research or development, or soliciting customers through the use of information that is a trade secret ... all constitute ‘use’.” Thus, selling products in the U.S. that were manufactured in a foreign country through the stolen trade secrets may constitute an actionable “use” misappropriation.

Criminal prosecutions under the federal Economic Espionage Act or certain state criminal statutes are becoming more common. American companies should consider seeking federal or state prosecutor assistance when foreign entities steal trade secrets. The right case may appeal to the criminal prosecutors. This option may be attractive when funds are limited for private enforcement of the trade secret rights.